Lax Student Loan Standards Created Debt Crisis, Report Finds

JupiterImages/Comstock Images(NEW YORK) — Lax loan standards have left many college graduates struggling to repay private student loans, according to a new study.

A report by the Consumer Financial Protection Bureau (CFPB) and the Department of Education found that the private student loan market grew from less than $5 billion in 2001 to over $20 billion in 2008. In 2011, the figure declined to less than $5 billion as banks began to tighten credit standards and the number of undergraduates with co-signers hit a high of 90 percent.

“Students were yet another group of consumers that were hurt by the boom and bust of the financial crisis,” wrote CFPB director Richard Cordray in a statement. “Too many student loan borrowers were given loans they could not afford and sometimes for more money than they needed. They are now overwhelmed by debt and regret the decisions they made.”

From 2005 to 2007, the report found that school involvement in student loans began to shrink and students began borrowing more than necessary. And, lenders began making exceptions for students with lower credit scores.

Private lenders gave out money without considering whether borrowers would repay, then bundled and resold the loans to investors to avoid losing money when students defaulted.

Impacted by the recession, in 2009, the unemployment rate for private student loan borrowers who began college during the 2003-2004 academic year stood at 16 percent. The amount of defaults has grown since then. According to the report, cumulative defaults on private student loans grew to more than $8.1 billion, and represents more than 850,000 distinct loans.

For many students, student loans are necessary to fund the college experience. The report found that in 2008, 42 percent of for-profit undergraduates received a private student loan, while only 16 percent of all undergraduates used a private student loan.

In 2011, over 90 percent of private students loans had a co-signer, up from 67 percent in 2008.

“After the financial markets crashed, some common-sense practices returned. Without investors willing to buy risky loans, lenders were forced to care more about a borrower’s ability to repay,” wrote Cordray.

“Now, most lenders make sure that students are not borrowing more than they really need when issuing a private student loan,” he wrote.

Student loan debt has grown to over $1 trillion by some estimates. Meanwhile, college tuition has doubled in the price in the last decade.